Policies, Incentives of Central Excise and Customs related to SSI
Central Excise duty is an indirect tax, collected by the manufacturers of
goods. Essentially it is a duty on manufacture of goods. The duty incidence is
passed on to the ultimate consumers who bar the duty incidence. Thus the
manufacturers who are made liable to pay the duty of excise, at the time of
removal of the goods from their factories, on the goods manufactured by them act
as agents to collect and pay the duty to the Government. It is a major source of
revenue to the Central Government and accounts for 25.31% of the total gross
revenue as per Finance Bill 1999-2000. The Excise Duty incidence is shared
almost by even of this country and thus he is the ultimate taxpayer. Common
examples are Toothpaste, Fuels etc.
As per Article 265 of Constitution of India, no tax can be levied without the authority of Law. Accordingly, the Seventh Schedule of the Constitution provides three lists, which define the powers of the Legislature. The validity of the tax is decided in terms of the nature of the tax and the entry in the above list of Seventh Schedule. List I deals with the Legislative posers exclusively conferred to the union (i.e. Central Government). In this list Entry 84, gives powers to impose Central Excise Duty by Union Government.
Under Industrial Development Regulations, the Government recognised the role of certain industries based on their size, supply, dependence on other major industries and investment in plant and machinery. Based on these factors they are identified as Ancillary Industrial Undertaking, Tiny Units and Small Scale Industries. In order to term an industry as a small-scale industry; the parameter laid down is the investment in plant and machinery. In order to compute the investment limit, certain inclusions and exclusions are provided in the notification. The classification under the Industrial Development regulations has no bearing in the administration of Excise Exemption provided to various products. Central Excise duty exemptions do not take cognizance of the status of the unit viz. Ancillary/Tiny/Small Scale Industries.
In order to encourage Small Scale Sector, which provides for large-scale employment and dencentralise the concentration of wealth from few to many, the Government has been formulating various policies and programmes to accelerate its growth. Major incentives offered by Central and State Governments are as follows:
Reservations of products for exclusive manufacture by small-scale industries.
Excise duty exemptions and concessional rate of duty based on value of clearances.
Income-tax concession under section 80-1A.
Priority lending from Banks and other financial institutions like SIDBI etc.
The Central Excise Duty is leviable only if there is a manufacturing activity and duty liability has to be discharged by the manufacture before removal of goods from his factory. What is ‘manufacture’ and who is the ‘manufacturer’ is defined under section 2(f) f the Central Excise Act, 1944 which reads as follows:
"Manufacture" includes and process,-
incidental or ancillary to the completion of a manufactured product; and which is specified in relation to any goods in the Section or Chapter Notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture, and the word " Manufacture" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.
From the above definition it can be seen that the term manufacture has two limbs viz. (a)any process that results in completion of a manufactured product.
(b) the activities specified in the Section Note or Chapter Note of the Central Excise Tariff.
The first part of the definition is rather vague and not fully defined. In this connection there are so many judgements in various cases. As per these judgements, it can be concluded that in order to deem a product as manufactured one, the new article must have a different name, character and use. Mere changes in the form or size of the same article would not amount to manufacture.
The second limb of the definition to section 2(f) refers to certain activities listed in the Section Notes and Chapter Notes wherein certain activities are specified as amounting to manufacture. e.g.
Chapter 30 Note 5 ( Pharmaceutical Products ) : In relation to products of Heading Nos. 30.03, conversion of powder into tablets or capsules, labelling or relabelling of containers intended for consumption and repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to "manufacture".
The Excise duty liability has to be discharged by the manufacturer so it has to be decided who is the manufacturer. The controversy is whether the manufacturer has taken place on his own account or on behalf of any other person. The statutory definition given under section 2(f) is an inclusive one. According to this definition, a manufacturer is a person who produces goods himself in his own account and also a person who gets his goods manufactured through hired labour. The real test is to examine who is actually engaged in the manufacture of goods. The business entity which actually fabricates or process the goods alone would be the manufacturer, liable to discharge the duty liability.
The Small Scale Industry, by enjoying the various exemptions available, can effectively compete with major units by virtue of the lower rate of duty. Also the cost of production will be less for small-scale industry leading to lesser assessable value. The marketing expenses, which roughly constitute between 30% and 40% of the final selling price would also get excluded from the purview of taxation if the small scale industry is selling the goods to large business houses, who in turn market them. It will be an effective tool of tax planning. However, in all these it is absolutely necessary to prove that the actual manufacturer is the small-scale industry who can legitimately avail the concessional rate of duty.
Every care should be taken to ensure that the unit is not projected as a front Company created only for exclusive purpose of tax evasion. In other words, the buyer will be controlling the activities of the manufacturer/seller is being reduced to the level of a ‘hired labour’ without any proprietary interest in the manufacture and sale of the goods. In such cases the Department will try to fix the Excise duty liability on the buyer if sufficient evidence is available to hold the buyer as manufacturer.
According to section 3 of the Central Excise Act, Central Excise Duty on all excisable goods shall be levied and collected at the rates set out in the Central Excise Tariff Act, 1985. For deciding the quantum of duty one has to look at the Central Excise Tariff Act and to determine the value, sections 4 and 4A of the Central Excise will come into play.
Effective from 1.3.1986, the classification of the excisable goods manufactured in India and its maximum rate of duty are codified and presented as a separate enactment known as Central Excise Tariff Act,1985. This is based on the International Nomenclature known as Harmonised System of Nomenclature. The tariff is divided into twenty sections with ninety-six chapters. It begins with raw materials and ends with the finished product.
While the maximum rate of duty leviable on the goods manufactured are given in the Tariff, effective rate, which will be less than the tariff rate, is governed by the exemption notification issued from time to time for various products under section 5A of the Act. In order to encourage certain products and the industries, the Government has been issuing exemption notifications from time to time. Such exemption notifications have the effect of reducing the tariff rate of duty. The exemption notifications are issued/continued based on the representations received from various chambers of commerce and associations representing the particular industry etc.
The exemption relating to small-scale manufacturers are governed by the notifications issued under the section 5A of the Act. Notification 8/99 CE, and 9/99 CE have the effect of reducing the normal tariff rate in a graded fashion based on the turnover of the manufacturer.
Now we will go to our topic of discussion.
Rule 174 of Central Excise Rules prescribes the procedure to be followed by the manufacturers to obtain the registration. Sub-rule (2) of rule 174, enables the Central Board of Excise & Customs to exempt person or class of persons, who need not obtain registration. However this has to be notified in the Official Gazette subject to conditions or limitations, as may be specified. Out of the various notifications issued by CBEC which are in force, Notification 22/98 CE (NT) dated 4.6.1998 is applicable for SSI. As per this notification, one time declaration has to be submitted. ( Annexure I ). If the goods are unconditionally exempted from payment of duty, exemption from Registration is available. However if the excisable product is exempted from payment of duty, subject to any one of the following conditions, then the manufacturer has to observe the procedure prescribed in the Notification viz. Submission of declaration, which is elaborated below.
Exemption based on
process of manufacture (e.g. Chapter Heading 1701.10 sugar without aid of power);
value or quantity of clearances made in a financial year ( e.g. SSI Notification 8/99);
condition stipulated in the Tariff Heading or the respective exemption Notification issued under section 5A of the Act ( e.g. 3402.12 soap manufactured without aid of power or steam for heating).
One time declaration and exemption
Wherever the turnover value of the SSI is well within specified limit, the manufacture has to submit a one time declaration, as given in the Notification 22/98 (NT), to the Jurisdictional Assistant Commissioner of Central Excise and obtain an acknowledgement. ‘Specified Limit’ is explained as full exemption limit minus RS.10 Lakhs i.e. under Notification No. 8/99 RS.50 10 = RS.40 Lakhs. However no declaration need to be submitted, if the unit remains within the specified limit. It is to be noted that exemption from Registration is not available if the goods exempted under Notification 8/99 exceeded RS 50 Lakhs for Home Consumption (i.e. excluding exports but including exports to Nepal and Bhutan ) either during the previous financial year or during the current financial year. In other words, once the unit crosses the exempted limit of RS.50 Lakhs, thereafter it cannot seek exemption from Registration even though the product may be entitled to fresh exemption, in subsequent years. Having Excise Registration does not mean that the SSI can never avail duty exemption after Registration. Thus the availability of exemption from Registration and the requirement of Registration and the requirement of Registration for various exemption notifications is tabulated below for easy understanding and better appreciation.
|Declaration for availing exemption and or Registration.
|SSI without MODVAT
| (a) To file one time declaration if turnover
is likely to exceed RS.40 Lakhs for Home Consumption.
(b) While crossing the exempted turnover of RS.50 Lakhs, Registration to be obtained
|SSI with MODVAT
|Registration from the very firsts clearance
|Cosmetics and toilet preparations
| (a) To file declaration if turnover is above
RS.5 Lakhs ( RS.15 Lakhs minus RS.10 Lakhs).
(b) While crossing the above exempted RS.15 Lakhs limit, Registration to be obtained.
|Refrigerator and Air Conditioner & parts
| (a) To file declaration if turnover is above
RS.5 Lakhs ( RS.15 Lakhs minus RS.10 Lakhs).
(b) While crossing the above exempted RS.15 Lakhs limit, Registration to be obtained.
Major Exemption Schemes for SSITaking note of the major role played by Small Scale Industries the Central Government have been granting exemption from payment of Central Excise Duty for specified goods over a period of time. The idea behind such exemption is to encourage Small Scale Industries by manufactured and marketing their products while competing with goods manufactured by major units. Basically there are two major exemption notifications available for the products manufactured by Small Scale Industries, and the same are elaborated below.
Notification NO. 8/99 Dated 28.2.1999 without MODVAT facility.
This notification is in force w.e.f. 1.4.1999. In a nutshell, SSI, which wants to avail the benefit of Notification, should not avail MODVAT credit upto RS.1 crore turnover. Turnover upto RS.50 Lakhs is wholly exempted and thereafter from RS.50 Lakhs to 100 Lakhs is excisable at 5%. However, capital goods MODVAT credit under rule 57 Q can be accumulated and the SSI can avail this credit only after the unit crosses the RS.1 crore turnover. The benefit of Notification is applicable only for the specified goods finding place in the Annexure to the notification. ( Annexure III). This would mean that the exemption is available for all goods appearing in the Central Excise Tariff Act, 1985 except the goods excluded in the Annexure to the notification.
Under this notification initially the SSI was expected to inform in writing to the Assistant Commissioner of Central Excise with a copy to the Superintendent of Central Excise giving the following details:
name and address of the manufacturer;
location/locations of factory/factories;
description of specified goods produced;
date from which option under this Notification has been exercised;
aggregate value of clearances of specified goods till the date of exercising the option;
The said requirement has been dispensed with now by Notification NO. 16/99 dated 31.3.99.( Annexure IV)
Notification NO. 9/99 CE Dated 28.2.1999 with MODVAT facility.
This notification came into force w.e.f. 1.4.1999. The basic features are:
MODVAT input credit can be availed both on the inputs and on the capital goods from the ver first clearances.
The rate of duty read with exemption would be as follows:-
Turnover Rate of Duty
RS.0 to 50 Lakhs 60% of the normal duty.
RS.50 to 100 Lakhs 80% of the normal duty.
Assuming the normal Rate of Duty is 15 %, the effective Rate of Duty in terms of exemption notification would be 9% of the first slab and 12% for the second slab, of course with MODVAT input credit on the inputs. Once the option is exercised, it cannot be changed during the same financial year.
Besides the two notifications mentioned above there are other notifications also with reference to specific goods and conditions.
Cosmetics and Toilet PreparationsThe notification No. 140/83-CE dated 5.5.1983 was to grant exemption for cosmetics and Toilet Preparations. The same has been amended by 10/99-CE dated 28.2.21999. As per this amendment the exemption limits have been substantially enhanced from RS.15 Lakhs to 30 Lakhs. Besides this the turnover limit has also been increased from RS.50 Lakhs to RS.100 Lakhs. For the turnover between 30-50 Lakhs the rate of duty is 50 % of the effective duty and whereas for 50 Lakhs and above the normal rate of duty. It is for goods falling under Chapter Heading 33.04,33.05,3307.10 etc.The value for the said purpose is as per section 4A.
Exemption for goods produced without aid of power
The Notification No. 167/86, dated 1.3.1986 exempts the certain goods from payment of Excise duty irrespective of the turnover limit and status of manufacturers i.e. be it SSI or Large Scale. The only condition is no process in or in relation to manufacture of the specified goods is ordinarily carried on with the aid of power. e.g.
69.02 Ceramic Building Bricks, Flooring Blocks
83.01 Pad Locks and Locks
Refrigerators/Air-conditioners and its parts
The notification No. 75/87-CE dated 1.3.1987 granting exemption falling above-mentioned goods falling under Chapter 84,85 and 90 has been amended by 10/99-CE dated 28.2.1999. The duty structure is just similar to the Cosmetics discussed above.
Goods produced in Cottage & Village Industry KVIC
Notification 198/87,dated 29.8.1987 grants exemption for the goods listed below from payment of excise duty without any limit or ceiling. The manufacturer has to produce a certificate from Khadi & Village Industries Commission regarding:-
genuineness of products being from village industry.
Such goods are marketed by or with the assistance of KVIC. e.g.
1301.90 Lac, gums, vegetable saps and extracts (without aid of power)
- Gum, wood or sulphate turpentine and other turpentine oils.
Goods Manufactured in Rural areas
Notification No. 88/88 CE dated 1.3.1988. e.g. Ch.34- Laundry and carbolic soaps.
Clubbing of Clearances
1989 (43) ELT 81 T The value of clearances of both the firms can be clubbed. The one firm was said to function in a garage where there was no sign of manufacturing activity.
1995 (78) ELT 261 T- The value of units can be clubbed when it was established that the two units which existed on paper had one roof, common machinery, painting facility, workers and integrated manufacturing facility.
1987 (32) ELT 94 T Common storage of raw material is not indicative of the fact that one firm is dummy of another and hence the value of clearances cannot be clubbed.
1993 (65) ELT 596 T Common Registered Office, use of telephone and godown is not sufficient to club the clearances.
997 (96) ELT 565T The value of clearances of two units cannot be clubbed even though employees are interchangeable from one unit to another, in absence of financial flow from one unit to another.
1987 (32) ELT 204 T A manufacturer, employing Manager and some of the employees of another unit is not indicative that two units are one and the same.
1990 (48) ELT 37 T Both the units ( one owned by husband and another by wife) have entered into separate agreement with a common labour contractor who supplied the Labour force to both the units, cannot be considered as adequate ground to hold that the operations may be colourable and the the value of clearances cannot be clubbed.
c) Common Directors/Partners
1988 (36) ELT 340 T- The value of clearances of two firms can be clubbed, if one firm is set by inducting their wives who are not playing any active role but authorised their husbands to manage the affair, with only objective of availing SSI exemption.
1990 (48) ELT 33 T A proprietor will be separately entitled to avail the exemption even though he is a partner in a firm which also enjoys the same exemption since a Partnership Firm is different from partners constituting it.
d) Dummy Units
1988 (33) ELT 636 T The clearances of two units can be clubbed since it was created for hiding and camouflaging the manufacturing activities.
Financial flow back and common funding.
1994 (71) ELT 689 The true test to club the value of clearances of two or more units is money flow back, profit sharing and total control of other unit or units.
In a Job Work, the raw material is given to the Job Worker, who performs the manufacturing activity or processing and return the same to the original sender. Commercially the manufacturer is compensated only to the tune of the conversion cost and his profit margin leaving the raw material cost, which is owned by the recipient. In view of the huge capital investment required for certain machinery and opting for job work is more profitable than resorting to have in-house manufacturing, it has become imperative to have certain operations done outside one’s own factory. Excise duty being on the manufacturing activity, the actual manufacturer has to discharge the duty liability. The cost of raw material plus conversion cost would be forming part of the assessable value. The duty liability on the goods manufactured on job work would depend upon the applicability of exemption Notification in vogue. If he affixes the Brand Name of the buyer on the goods manufactured, then the benefit of excise exemption Notifications 8/99 and 9/99 would not apply.
The Small Scale Industry, as a job worker, can receive inputs; partially processed goods for further manufacturing under rule 57 F (4). As per the procedure the materials will be received by the Small Scale Industry only under the proper Challan, which has to be accounted properly, to convince the department as and when required by the Department. There is no duty liability at the hands of the job worker if he returns the material received under the challan after due processing. The Small Scale Job Worker is expected to complete the processing within 180 days time limit and return the same along with duplicate copy of the challan.
In the Union Budget 1999 it is contemplated that Commissioner of Central Excise is empowered under Rule 57F(4) to permit removal of goods on payment of duty from the premises of the job worker.
SSI and ExportsNotification 8/99 exempts from payment of Central Excise duty, where the Small Scale Industry is having a turnover less than RS.50 Lakhs. Such an unit may not have registration and would have only filed the declaration seeking exemption from registration. If such a unit also exports goods out of India they are exempted from observing the normal procedure like execution of bond, movement under AR-4, etc. However the unit must take out the registration once it crosses the exempted turnover for the home consumption. It is advisable to obtain the registration in the above situation which will facilitate availment of MODVAT Credit for inputs, receipt of non-duty paid inputs under rule 13(1)(b) etc. despite the involved procedure to be followed.
If a Small Scale Unit is exclusively engaged in export to countries other then Nepal and Bhutan, the Notifications 8/99 and 9/99 will not have any application. Such units will be governed by rule 12, 13 or 14 of the Central Excise Rules whereby the Small Scale Industry can export the goods manufactured without Excise Duty incidence.
Goods exported outside India (other than Nepal & Bhutan ) will not form part of the turnover slabs under Notifications 8/99 or 9/99. Any turnover relating to exports would be excluded for the purpose of computation of the aggregate value of the specified goods both for the purpose of computing the turnover slab as well as the upper turnover for the preceding financial year viz. RS.300 Lakhs.
In order to encourage exports and relieve the duty burden on the commodity being exported both in terms of duty incidence on the inputs and the outputs, several schemes are contemplated by the Government.
The finished product can be exported, on payment on normal duty and exported out of India. The amount paid as Excise duty on the finished product can be obtained by way of refund. The refund application has to be made by enclosing the original and duplicate AR-4 Forms along with attested copy of Shipping Bill and Bill of Lading. This procedure is governed by rule 12 of the C. Excise Rules.
Central Excise rules 13 and 14 permit manufacturers to clear goods without payment of duty after executing the bond. Rule 13 deals with one time export, whereas rule 14 is meant for exports on continuous basis whereby credits and debits are made in a bond register indicating the duty amount involved for each consignment.
Central Excise rule 12 (1) (b) permits refund of duty paid on inputs contained in the export product. The manufacturer is supposed to file a declaration to the Commissioner giving the details of finished products to be exported, manufacturing formula, ratios of input and output, Tariff classification and rate of duty on the inputs. This facility is available only for direct exports. The manufacturer exporter is required to maintain RG-26 Register for inputs and RG-27 register for outputs and submit the Quarterly Return in Form RT-14.
Under rule 13(1)(b) the Central Government has issued the Notification, which facilitates receipt of non-duty, paid inputs for export manufacturing. The movement of the non-duty paid material is made under bond as per the procedure prescribed.
Export and MODVAT
The MODVAT availed on inputs can be used for the payment of duty on the output. However if the product is exported under bond, without payment of excise duty, then the MODVAT Credit accrued on the inputs, can be utilised towards payment of excise duty for any goods manufactured and cleared for home consumption. If such utilisation is not possible, the manufacturer can apply for refund. The refund claims are to be submitted not more than once in any quarter.
It is already seen that MODVAT Input Credit cannot be availed under Notification 8/99 till the SSI crosses the turnover of RS.100 Lakhs slab. Such SSI which is within RS. 100 Lakhs turnover, can avail Modvat Credit exclusively for export production. It is clarified by the Board’s Circular dated 14.7.97. (Annexure V) According to this Circular the simultaneous availment of Modvat Credit for exports and non-availment for home consumption is permissible.
SSI need not submit monthly RT-12 return. They have to submit a quarterly return.
Excise Inspectors, preventive parties and audit parties can visit SSI unit only with specific permission of Assistant Commissioner.
Regional Advisory Committee- specially for Small Scale sector. The meeting of the committee are held every quarter.
Union Budget proposal - 1999
Para 67 of Speech of Finance Minster on 27.2.1999 in the Lok Sabha "Under the current procedure, all manufacturing units are required to pay excise duty at the time of clearance of goods from their manufacturing premises. As a measure of further simplification of administrative procedures, I propose to permit SSI units to pay excise duty on a monthly basis with effect from 1.6.1999. Besides constituting a significant step in the simplification of procedures, this change will also improve the liquidity position of the manufacturing units in the SSI Sector."
he said proposal has given effect by issue of Notification No.36/99-CE (NT) dated 26.05.99. The procedural part has been explained in the CBEC’s Circular NO. 458/24/99-CX dated 27.05.99. (Annexure VI).
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